CREDIT AND MONETARY POLICY By RBI
INTRODUCTION
-Monetary policy is the macroeconomic policy laid down by the central bank.
-BY THIS DESIRED LEVEL OF MONEY FLOW AMF ITS DEMANDS ARE REGUALED
-IN ALL OVER THE WORLD IT IS ANNOUNCED BY THE CENTAL BANK OF and in India it is by the Reserve Bank of India [RBI]
-RBI uses many instruments to put this policy such as -CRR , SLR , REPO RATE , REVERSE REPO RATE , BANK RATE , SLR , OMO etc . following is the brief expalnation of these terms .
RBI
-Established on 1st April, 1935 due to the RBI Act, 1934
-Privately owned initially and was nationalized in 1949
– Fully owned by the GOI
– Issues bank notes, keeps reserves for monetary stability
– Maintains price stability
– 2016 amendment to the Act according to Section 45ZB ,6 members are in Monetary policy committee to be constituted by the Central government
– there are total 6 members – 3(RBI) 3(selected by Govt)
– Broad parameters of issuing license, branch expansion, liquidity of assets.
-Manager of foreign exchange
-it has four local boards North ,South ,East , West.
-IT HAS MAXIMUM 21 DIRECTORS
1.NON OFFICIAL DRECTRS [term 4 years or earlier ] -a] 10 -nominated by central goernment
b]4-directrs of local bodies
c] 3-nominated by RBI governor
2.official directors -[term 3 years or decided by central government ] appointment by the cabinet committes on apponment
a] governor + 4 deputy governor
functions of RBI
-prints money [not rs 1 ]
-keeps reseves of gold, foreign exchange
-mantains price stability and external value of rupee too
-licence to banks merger /amalgamation of banks , banks expansion
– Maintains external value of rupee
– Promotional functions to support national objectives such as institutional arrangements for rural or agricultural finance
– Financial inclusion
– Banker to the government
– Lender of the last resort to banks
STRUCTURE OF RBI
– CENTRAL BOARD OF DIRECTORS – SHOULDN’T BE MORE THAN 21 DIRECTORS
| NON OFFICIAL DIRECTORS | OFFICIAL DIRECTORS |
| 2 GOVT OFFICIALS 4 DIRECTORS FROM RBI’S LOCAL-BOARDS (NORTH, SOUTH, EAST, WEST)-10 DIRECTORS – NOMINATED BY THE GOVERNMENT |
-ONE GOVERNOR -4 DEPUTY GOVERNORS |
MANAGEMENT OF RBI
-APPOINTMENT OF GOVERNOR AND deputy governor tenure is of three year. . It they can be reappointed.
– SELECTED BY FINANCIAL SECTOR REGULATORY APPOINTMENT
SEARCH COMMITTEE WHICH IS HEADED BY THE CABINET SECRETARY
-NAMES OF SUCCESSFUL CANDIDATES ARE SENT TO THE APPOINTMENTS COMMITTEE OF THE CABINET FOR the last assent.
Monetary policy committee
– The composition of this committee as on April 2019 is as follows:
-amendment in 2016 [section 45 Zb]
-six members which include three from RBI and THREE FROM GOI
-QUARUM -[minimum members needed for it to be a valid meeting ] four members.
-needs to meet atleast four times in one year
-prepares a monetary policy report once in every 6 months which gives :
a] sources of inflation
b]forecast of inflation for next 6-18 months
– The resolution adopted by the MPC is published after the conclusion of every meeting of the MPC.
LIQUIDITY ADJUSTMENT FACILITY
CASH RESERVE RATIO |
A PERCENTAGE OF THE NETTIME AND DEMAND LIABILITIES HAVE TO BE STORED BY BANKS WITH RBI FORTNIGHTLY IN THE FORM OF CASH OUT OF WHICH THE BANKS EARN NOTHING |
STATUTORY LIQUIDITY RATIO
|
AFTER DEPOSITING THE CRR, ANOTHER PERCENTAGE OF THE NET TIME AND DEMAND LIABILITIES HAVE TO BE KEPT ASIDE BY THE BANK IN THE BANK’S CHEST. THIS IS A STATUTORY REQUIREMENT AND IT HAS TO BE IN A LIQUID FORM WHICH BE CASH (but bank will earn nothing out of it); GOLD (the rates keep fluctuating and hence a bit risky) and GOVERNMENT SECURITIES (bank prefer this as they earn interest) |
REPO RATE |
the rate at which bank pays back a short term loan[ upto 14 days ] to RBI after giving government security [non SLR] as a collateral. |
REVERSE REPO
|
the rate a which RBI pays back a short term loan to a bank .this may happen when bank wants to create assests and is unavailable to do so because it is not getting any customers .it may also happen when bank is earning more by giving a short term loan to RBI instead of customers. |
MARGINAL STANDING FACILITY |
This is an overnight facility availed by a bank wherein it borrows from RBI by keeping the SLR govt security as a collateral as it is left with no other govt security to keep as a loan. The rate which the bank pays back to the RBI is known as a penal rate.
|
Difference between repo rate and marginal standing facility-
| Repo rate | Marginal standing facility |
| To commercial banks |
Only to scheduled banks |
| For a short term need |
Overnight need |
| Has a repurchase agreement of securities (the bank has to pay the principal amount and rate of interest in order to buy back its govt securities that it has kept with the RBI) |
No (since it is a SLR requirement, there is no repurchase agreement. In case a bank is unable to pay the rate of interest and principal amount, RBI may have to shut it down) |
BANK RATE
The rate at which bank pays back a long term loan to RBI wherein no collateral is provided. It is usually higher than the repo rate
LONG TERM REPO OPERATIONS
-RBI will provide a loan for a tie period of upto 1 to 3 years to banks
at the prevailing repo rate for which it will accept government securities with the same time period as the loan or a greater time period as a collateral.
– Banks will get long term funds at a lower rate.
– This means that the bank will be able to give loans to public and
organizations at a lesser rate
– OPEN MARKET OPERATIONS[OMO]
1. Open market operations is the sale and purchase of government securitize and treasury bills by RBI or the central bank of the country.
2. The main aim of the OMO is to optimal money supply in the economy and in system.
3. When the RBI wants to increase the money supply in the economy, it
purchases the government securities from the market and it sells securities to absorb the liquidity from the system.
4. RBI did the OMO by the commercial banks and it does not directly went to the public.
5. It is special and basic tool that RBI use for the maintenance of liquidity conditions through the year and minimize its HARMFUL EFFECT on the ROI and inflation rate .
MARET STABILIZATION SCHEME
During Demonitization the money supply increase with the banks .RBI gave government securities with zero percent rate of interest to the banks to reduce this money supply so that inflation does not increase beyond an undesirable limit.
METHODS BY WHICH BANK CALCUATE THE RATE OF INTEREST which it applies upon customers :
1.benchmark prime lending rate -Upto June 2010
dependent upon actual cost of funds .it was seen that bank used to subsidise corporate loans [EXAMPLE AMABANI] and to recover costs ,they used to increase ROI of small borrowers
2.BASE RATE [June 2010 -April 2016] minimum base ROI is fixed that is applied on customers .
based on 3 factors :
a] actual cost of funds
b] cost of Unallocated funds [like CRR and SLR]they cant be used for making assets]
c]return on net worth [NET INCOME -EXPENDIURE]money earned by properties ,assests ,branches ,investments IF its is less then ROI will be high and vice versa .maximum limit is not here so it is problem
3. marginal cost of lending rate [April 16 onwards ]must be in official site
a[marginal cost of funds [to give last unit rupees how much money i need ]
b] negative carry on CRR [because bank does not take ROI in this from RBI]
C]OPERATIONAL COST [SPENDING on electricity , food ,rent ]
d]Tenure premium : shorter the term; shorter the risk; short will be the ROI and opposite case for the long term.
4] External Benchmarking [October 19 onwards] : this is transprancy to to RBI by the banks .banks were asked to fix their actual cost of funds and add it to an extrenal benchmark which could be any one of the following :
a[ repo rate .
b]3 months yield on treasury bill
c]6 months yield on a treasury bill
d]any other benchmark fixed by the financial benchmarks India Private Limited.
QUALITATIVE MEASURES BY RBI IN MONETARY POLICY
priority sector lending
-40 percent loans to be given to these sectors at less ROI.
-sectors -agriculture , MSME , affordable housing , education , renewable energy , export credit, startups , other weaker section , farmers who want to establish solar power plant or biogas plants ,,social infrastructure .
Priority Sector Lending Certificate
-it is financial instrument through which an over achiever bank [a bank which ha given loan to priority sector which is more then the target ]transfers the extra loan to the the under acheiver bank without transfering the risk involved .this means that if the borrower is unable to pay back ,the bank which has transfered the loan will be responsible to sell off the collateral and make sure that the loan is paid back .
-if a bank is unable to find an overachiever bank then it can give this loan to any of the folowing
a]NABARD -National Bank for Agricultural and Rural Developement
b]SIDBI-Small Industries Develpement Bank of iNDIA
c]EXIM-Export and Emport Bank
d]Micro Unit Developement Refinance Agency
MORAL SUASION
these are ideal practices which must be foloowed by a bank as per the instruction of RBI.